It may be big, and it may have enjoyed years of growth from its stakes in fund managers, but its latest numbers tell an all too familiar story. In the second quarter of this year, AMG’s net inflows fell to $ 600 million – against $ 4 billion a year ago – as cheap passive strategies won the lion’s share of new business. Even before writing off acquisition costs, its net income from stakes in its 40 affiliate boutiques fell 3% to $ 166.5 million, reversing annualised growth of 30% in the five years to 2015.
AMG’s share price has fallen 31% to $ 143 over the past year, as investors have begun to fret over the sector’s declining prospects. As early as in December its share rating suffered a hit when its affiliate Third Avenue was forced to gate its £790 million Focused Credit fund against prospective redemptions.
Perhaps this is a sign of things to come. This August, US consultant Casey Quirk, now owned by Deloitte, warned that active managers are facing five years of attrition.
But Healey, an enthusiastic wrestler when attending Harvard Law School between 1983 and 1987, does not capitulate readily. He knows there is a select breed of active managers who do their homework and outperform most years. AMG has paid top dollar to back several of them. And despite its recent setback, AMG’s shares have outperformed 75% of its peers over five years.
On the fallout from Third Avenue’s fund, he is terse: “It’s no more than 10% of a firm which contributes to 1% of our earnings.” The firm has started to explore the sale of the fund, according to The Wall Street Journal.
Healey argues that critics have been wrong before – during the 2008 credit crisis, in particular, when they said his affiliates would require a bailout or worse. At one point, AMG shares skidded to a low of $ 19, against a credit boom peak of $ 134.
“At the trough, there was a misapprehension of the quality of our business. We only needed to provide financial support worth single-digit millions in 2009. And the businesses have grown, enjoying the upside by having skin in the game.”
AMG came out of the crisis in strong shape and went on to back a stream of new affiliates, sold by parties keen to raise cash. During 2009, it negotiated a $ 750 million investment in Russell Investments’ private equity firm Pantheon and backed a buyout of UK-based manager Artemis from troubled banking group Fortis. Both deals were finalised in February 2010.
Renewed uncertainty over the past year has brought AMG more opportunities, including the $ 800 million purchase this summer of stakes in five alternative investment firms owned by Petershill from Goldman Sachs. This brought AMG stakes in a range of hedge funds such as Winton Capital.
Knowing deals were on the stocks, Healey prioritised networking in London. For now, his pursuit of deep sea fishing has taken a back seat. Healey booked a week off in early August to test the waters off Madeira, although this could scarcely compare to 2009, when he landed a 93.5 pound white marlin off Maryland.
Healey believes he can beat the odds by investing in boutiques allowed to manage their own affairs.
Third Avenue parted company with its former chief executive David Barse in 2015. But moves like this are rare. Healey says: “We don’t want to get involved in managing an affiliate. We leave that to incumbent managements, incentivised through their profit share. It’s a complete fallacy to say, sitting here, we can change managements to put things right.”
Terms vary widely but AMG generally buys economic interests ranging between 30% and 50%. Sometimes a bit more.
Healey says: “This is typically a fixed percentage of revenues. If the managing partners spend more than they should, and margins are suppressed, we will not absorb that. Although we don’t benefit from the upside in the same way, our income is somewhat protected.”
There is another benefit for affiliates. AMG is increasingly helping them pitch to large institutions, through a central marketing division.
Andrew Dyson, former head of clients at BlackRock, has led the central marketing initiative for five years during which AMG itself has helped secure half of the $ 110 billion of new business won by its affiliates. Healey adds that AMG has plugged his managers into solutions put together by third-party advisers. But it has no plans to develop its own solutions business: “Advisory fees are too low.”
Even so, affiliates cannot avoid paying AMG a big slug of revenues. An investment banker says: “When a new generation takes control, they are more likely to question the arrangement than people who did the deal.”
Healey gets this: “You need to earn the trust of your affiliates every day. It doesn’t mean you need to be in their offices the whole time. But they need to know you are available. You need to earn the position of trusted adviser. The next generation needs to feel the same way. A big part of my job is building a personal relationship.”
He points out that AMG likes to continue working with affiliate founders, where possible: “They often sell a little and want to stay in the game.” When the founders step back, AMG can help to ease a new generation of managers into position.
A rival manager says: “Sean and his senior people have built up an extraordinary cult following.” As well as keeping AMG together, this factor helps Healey strike deals. Last November, Leda Braga sold a stake in Systematica hedge fund to AMG. Healey says: “Before we did the deal, she called up Andrew Feldstein, at [AMG affiliate] BlueMountain and asked him how helpful we’d been.”
As well as general advice, AMG retains the support of affiliates by bringing them up to speed with risk control, compliance and marketing, often discussed in open forum.
“Sophisticated institutions are getting larger, and shrinking their number of relationships. A single boutique cannot get the right kind of conversation, but we can. We are in the position to become a valuable counterparty by offering institutional clients one-stop shopping.”
The case for active
So what’s next for the group?
Healey has the highest respect for passive providers like BlackRock and Vanguard, which have bulked up to keep their fees down: “The growth of passive cannot be inexorable, but there will be a winnowing of large public and private firms and some consolidation.” But Healey believes talented active managers deserve a seat at the table. His business model depends on it.
To broaden his opportunity set, Healey backs a posse of wealth advisers managing $ 35 billion which can offer high net worth opportunities to active affiliates, as part of their initiatives. Healey has developed a US retail platform for affiliates to use, if they want to. He would like to build one in Europe in due course.
More than half of AMG’s profits come from alternative managers such as Winton Capital Management, ValueAct and AQR. Following the Petershill deal, nearly half AMG’s assets comprise alternatives. He insists hedge funds still have a good future: “But they are in a more mature phase and a low-return environment. We can offer them benefits from scale.”
But Healey does not want to depend too heavily on alternative managers and their performance fees. He remains on the prowl for traditional deals. He’ll look at what investment banks are offering, but his preference is to stay in personal touch with the best investors.
“We can do bigger deals, but there are few really good ones, and I am pretty hesitant about taking them on. The growth rate of our existing businesses is strong and I am perfectly happy to continue building businesses in a measured way.”
• No Gross salary
Healey started his career at Goldman Sachs, gravitating towards financial institutions, where he worked for Christopher Flowers. In a final deal for Goldman in 1993, he worked on the injection of a bond manager run by a certain Bill Gross into a company, Pimco, backed by private equity firm TA Associates.
Healey says: “Bill Gross and his team were very driven. I knew they would be successful. But I didn’t know how successful. And even they did not anticipate a 25-year bull market in bonds. They were backed by a strong tide, and swimming faster than anyone else. They were extraordinarily single-minded… disdainful of equity managers.”
Gross has been richly rewarded for his efforts. His bonus at Pimco hit $ 300 million in 2013, while Healey – who started AMG, with TA’s backing, in 1995 – had to rub along on $ 14.9 million in 2015, nearly all comprising performance and equity-related compensation. Healey’s base salary was $ 750,000. An additional $ 2.6 million relating to 2014 was paid in 2015.